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Insurance Only Covers Defense
by Ron Davis

Noxious odor detected at an Arizona shopping center has led to a lengthy lawsuit involving the center’s hired contractors.

The shopping center is The Shoppes at Legacy House in Mesa. And the center hired the contractors to install plumbing pipes and fixtures. The chosen contractors then hired a subcontractor to install the plumbing for the center. That contractor in turn purchased an insurance policy for protection during the installation process.

That installation went uneventful at first. But soon after completion of the installation, four tenants suffered breathing-related injuries that were apparently caused by a plumbing defect. Moreover, two additional later suffered injuries also traced to a plumbing defect.

And that wasn’t all that went wrong. Other tenants encountered “sewer odors” that various tenants alleged were “sickening,” “horrific,” “revolting,” and “debilitating.” The stench was later traced to a noxious gas known as hydrogen sulfide.

Four of the tenants attempted to continue business as usual, but soon failed, suffering “catastrophic damages.” They blamed their failure on the presence of the odors at the shopping center.

The tenants then sued the center’s owners, alleging that the problem was due to the “sickening gaseous odor radiating from the shopping center.” The tenants’ argument also claimed that because of the presence of noxious sewer gas, they were prevented the use of “tangible property.”

Sigma Contracting, which handled construction of the shopping center, was caught in the middle of the dispute and argued that its insurance policy, from James River Insurance, should provide appropriate defense coverage. But that conclusion was based on the James River policy, which noted an “absolute exclusion for any claim arising from gas pollution, such as what was alleged in this matter.”

So the dispute boiled down to whether James River had any duty whatsoever to defend and indemnify Sigma in the third-party complaint. It was undisputed that the tenants suffered property damage. Also, there was the question of whether the property damage was caused by the presence of noxious gas in the shopping center environment.

At trial, the parties agreed that such claims are governed by the policy provision for the “loss of use of tangible property that is not physically injured.” When such a loss materializes, they added, then “all such loss of use shall be deemed to occur at the time of the occurrence that caused it.” In sum, the court concluded the following:

  1. James River had a duty to defend Sigma and breached that duty.
  2. James River had no duty to indemnify Sigma for property damage caused by the plumbing installation, “as none of the property damage…could be traced to an ‘occurrence’ during the [policy coverage].”

(National Fire Insurance Co. v. James River Insurance, et al. F.Supp.3d, 2016 WL 613964

Decision: March 2016
Published: March 2016



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